Hindustan Zinc Rating: Hold- Q2 indicates company’s on steady course

Hindustan Zinc (HZL) has paid out an interim dividend of Rs 21.3/share. This is in addition to the interim FY20 dividend of Rs 16.5/share announced in May’20. Net cash post dividend payout will be ~Rs 88 bn, or ~Rs 21/share. HZL has debt of Rs 98 bn (NCD + commercial paper + term loan). Leveraging-up of the balance sheet has been carried out to improve capital allocation and improve payout. While leveraging-up is a first of a kind trend for HZL, management highlighted that it would ensure healthy capital structure.

Q2FY21 Ebitda was largely in line at Rs 29.5 bn. Higher silver realisation and sales have ensured that segment Ebit for silver matches that of Zinc/lead. Substantial reduction was observed in zinc cost of production (CoP), down 10% y-o-y, helped by 14% y-o-y reduction in employee costs. Maintain Hold with a TP of Rs 218/share.

In-line operational performance; integrated silver production the key surprise
Mined metal production for Q2FY21 was up 9% y-o-y and 18% q-o-q to 238kte. However, this was offset by decline in metal grades and lower ore treatment.

Integrated zinc production was 180kte, up 9% y-o-y and 15% q-o-q, while integrated lead output was 57kte, up 29% y-o-y and 28% q-o-q. Integrated silver production was up 73% q-o-q, in line with higher lead production, better silver grades at SK and higher concentrate inventory.

CoP continues to moderate on favourable commodity environment and lower employee costs. CoP declined 12% y-o-y and ~10% q-o-q. It benefitted from lowered commodity prices and cost-reduction initiatives. Also, acid realisations improved significantly q-o-q.

Signed an MoU with Gujarat government for 300ktpa zinc smelter
The three reasons for the MoU we could gather are: (i) more efficient access to external concentrate; (ii) presence in Gujarat might also help improve overall export mix; and (iii) as a part of the follow-through expansion plan from 1.2mtpa to 1.5mtpa of mined metal, separate planning for smelter (debottlenecking/brownfield / greenfield) would have been necessary.

Guidance for FY21: Mined and integrated metal production is guided to be at 925-950kte y-o-y. FY21 silver production is guided at 650te. Zinc CoP will be <$1,000/te. Project capex for FY21 is planned at $100 mn-140 mn.

What’s ideal capital structure for HZL?
Given through-cycle Ebitda capability of Rs 100-150 bn, net debt of 1.5x Ebitda should be justifiable. The only caveat though is that the captive mine status can be challenged as the mines come up for auction. Also, management decision to start the pre-feasibility study for a smelter in Gujarat may also be with an eye to reduce the dependency on captive ore.